Despite rebound, stocks end worst week ever

By Charley Blaine and Elizabeth Strott

The stock market finished its worst week ever with a dramatic rebound from even worse lows.

The Dow Jones industrials moved more than 1,000 points during the session -- from a low of nearly 700 points to a gain of more than 300 -- before falling back again. It was the first 1,000-point swing for the blue-chip index.

The blue chips closed down 128 points, or 1.5%, to 8,451. Twice during the day, the index fell under 8,000 for the first time since April 2003. Twice it bounced back.

The Standard & Poor's 500 fell 11 points, or 1.2%, to 899. But the Nasdaq Composite Index gained 4 points, or 0.3%, to 1,650. A big engine in the Nasdaq's gain: a 9.1% gain to $96.80 in Apple (AAPL, news, msgs). The iPod maker had fallen as low as $85 at the open.

For the week, the Dow and S&P 500 were off 18.2%. It was the worst week for the Dow in its 112-year history and the worst week for the S&P 500 since the week of May 21, 1933. The Nasdaq's 15.3% loss was its worst since the week of April 10, 2000, as the dot-com bust broke.

• Video: The week in review

The market turmoil was so great that crude oil tumbled in response, finishing Friday at $77.70, down 10.3% on the day and 17% on the week. The close was crude's lowest since September 2007. Energy stocks were slammed as well, with declines exacerbated by margin calls forcing many investors to sell shares.

"A psychiatrist is what is needed to help investors today," Tony Crescenzi, chief bond market strategist at Miller Tabak, told MarketWatch.com.

Did the rebound signal a bottom?

It's too early to say if Friday's rebound from its lows means stocks have seen a bottom. The Dow, S&P 500 and Nasdaq are all off more than 40% since peaks reached in October 2007 and have lost 27%, 30% and 30%, respectively, since Aug. 31.

But watch the Dow and S&P 500 on Monday. The Dow hit a low of 7,882.81 at 9:37 a.m. on Friday and nearly hit it a second time at 1:50 p.m. ET, bottoming in that round of selling at 7,978. The S&P 500 bottomed at 839.80 at 9:37 a.m. and tested that level again without falling below. The second bottom was 842.43.

If anything like a bottom was achieved, it came then. And it is possible that the market will rally sharply soon and then muddle along for a while waiting for a catalyst to send it higher.

Indeed, futures trading late Sunday signaled that the Dow would open as much as 353 points higher, with the S&P 500 jumping 47 points at the open.

The catalysts were a rally in Asian stocks Australia guaranteed bank deposits, and European leaders agreed to support lenders in a global effort to end the credit crisis.

U.S. officials were to announce a new plan to recapitalize the nation's financial sector, but a big question was how to make it both genuinely voluntary and effective, the Financial Times reported.
Sources told the Financial Times that the U.S. plan would be open to non-bank financial companies such as GE Capital as well as banks, although the Treasury was not inclined to make public capital available to hedge funds or insurance companies.

Two more market measures suggest the U.S. market is grossly oversold and could bounce higher:

• The fear indicator. A widely watched measure of market fear, the CBOE Volatility Index ($VIX.X), hit a record 75.92 Friday before dropping back to 69.95. The higher the VIX, the more fear there is in the market. But often, when the VIX starts to drops, a sharp rally erupts.

• The 200-day moving average. The S&P 500 closed Friday about 31% under its simple and exponential moving averages. Typically, the index level falling 12% to 15% under the 200-day moving average is a buy signal.

But a rally is no sure thing -- especially right now when raw fear rules the stock and credit markets.

A very negative catalyst -- such as weak market response to Friday's G7 announcement and the Treasury Department's plan announced Friday to buy stakes in banks -- could come as early as Monday.

And that's just the first headwind. The second wind gust will start big-time on Tuesday when the third-quarter earnings season kicks into high gear next week, and investors are bracing for lower profits and reduced profit estimates from companies. Among companies set to report: Intel (INTC, news, msgs), Johnson & Johnson (JNJ, news, msgs), JPMorgan Chase (JPM, news, msgs), Wells Fargo (WFC, news, msgs), Citigroup (C, news, msgs) and Google (GOOG, news, msgs).

If the reports are worse than expected, stocks could fall back.

But by far the largest problem remains the global credit crisis that has made banks in the United States and elsewhere unwilling to lend to each other. The crunch has threatened many businesses because they can't get short-term financing to fund daily operations. The crunch has also resulted in fewer customers getting approved for mortgages, car loans and credit cards.

In addition, many investors have lost confidence in markets, government solutions to fix the problems and corporate management skill.

"Things are still very stressed, and we don't know what's going to fix it, " Barry Moran, a currency trader with the Bank of Ireland in Dublin, told Bloomberg News.

The three-month London interbank offered rate, or Libor, rose to 4.82% Friday from 4.75% Thursday. It was the highest level all year and was up from 2.82% one month ago.

Higher Libor rates indicate aversion to lending and to risk generally. The Libor typically follows central banks' interest rates.

The stock market plunge -- the Dow has fallen 22% so far in October -- has forced many hedge funds to liquidate stocks to meet margin calls. Another casualty: Chesapeake Energy (CHK, news, msgs) CEO Aubrey McClendon was forced to sell "substantially all" of his company stock over the past three days to meet margin loan calls.

Unless the cash gets freed up, experts say, the U.S. could face a very serious recession. Other countries may face bigger problems.

Finance officials from the major industrial nations, the so-called G-7, were meeting this weekend in Washington, D.C., to discuss the situation. Late Friday, they agreed on common guidelines to address the world financial crisis, a move that opens the way for a series of government actions. But The Wall Street Journal said the agreement falls short of the joint plan that many investors had sought.

Among the guidelines, countries agreed to "use all available tools" to prevent systemically important financial institutions from failing, and to ensure that bank deposit insurance programs are solid; to ensure that banks can raise capital from government as well as private sources.

Many investors and traders were disappointed in the deal; they'd hoped for a dramatic G-7 accord, such as a concrete agreement to guarantee bank debt.

U.S. to buy stakes in banks

While the G7 ministers were working on a comprehensive plan, Treasury Secretary Hank Paulson said late Friday that the government will move ahead with plans to buy equity stakes in financial institutions. The administration received authority to make direct purchases of stock in the $700 billion rescue bill Congress recently passed.

Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

The new plan seems to supplant the $700-billion plan to buy distressed mortgage-backed securities that the administration convinced Congress to approve only a week ago. That plan seems to have been put on a back burner in favor of this new approach which would, in effect, partially nationalize the industry.

While the Treasury department says it still plans to buy up distressed assets, the scope of that plan is unclear, The New York Times said. And, The Time said, the federal government meanwhile has directed Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), the government-controlled mortgage giants, to ramp up their purchases of troubled mortgage bonds, in what could be a speedier and less formal process than the reverse auctions proposed by the Treasury.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	8,451.19	10,325.38	-18.15%	-36.29%
S&P 500	899.22	1,099.23	-18.20%	-38.76%
Nasdaq Composite	1,649.51	1,947.39	-15.30%	-37.81%
Russell 2000	522.48	619.40	-15.65%	-31.79%
Crude oil per barrel	$77.70	$93.88	-17.23%	-19.05%
10-yr. Treasury yield	3.86%	3.83%	0.03%	-4.31%
Gold per troy ounce	$859.00	$833.20	3.10%	2.51%

A wild last hour of trading

The last hour of trading Friday had been billed as potentially crazy, and it delivered. There were reports that hedge funds are being forced to sell stocks to meet margin calls from brokers. The market is also being hit by redemptions by mutual funds.

Then, the rally took off, in part because many investors began to sense that a credit plan would emerge this weekend.

The biggest losses came from energy stocks, which were falling because of a sharp decline in crude oil. Crude in New York fell 10.3% to $77.70. That's the lowest close for crude since September 2007.

Losses for Dow components Chevron (CVX, news, msgs), down 9.6% to $57.83, and ExxonMobil (XOM, news, msgs), down 8.3% to $62.36, were worth about 93 points of the Dow's loss by themselves.

Twenty of the 30 Dow stocks were lower on the day along with 321 S&P 500 stocks and 61 Nasdaq-100 ($NDX.X) stocks. The Nasdaq-100, which tracks the largest Nasdaq stocks, was down 5 points, or 0.4% to 1,270. Apple's gain was worth 11 points for the index.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$77.70	$86.59	-$8.89	-22.79%	-19.05%
Heating oil (per gallon)	$2.2100	$2.4186	-$0.2086	-22.79%	-16.58%
Natural gas (per million BTU)	$6.5350	$6.8250	-$0.2900	-12.14%	-12.67%
Unleaded gasoline (per gallon)	$1.8070	$2.0273	-$0.2203	-27.27%	-27.45%

An expensive Lehman Bros. legacy

Sellers of insurance on bonds issued by bankrupt investment house Lehman Bros. may face demands that they pay out more than 91 cents on the dollar to buyers of those insurance contracts.

That’s the upshot of an unusual auction process Friday that established the price for defaulted Lehman debt and, in turn, potential claims payouts on insurance protecting that debt, known as credit default swaps.

Certainly, some firms will take a hit because of the pricing, potentially amounting to billions of dollars in combined losses. In the Lehman auction, participants included most major financial firms from around the world. But it’s too early to tell which companies will be on the hook or for how much. Some of the sellers bought protection for themselves, for example.

In a best-case scenario, said Barry Silbert, chief executive of SecondMarket, a marketplace for trading illiquid assets, financial companies that sold default swap contracts would make their payouts in the coming weeks, have enough capital to cover all the positions, and take their losses and move on.

In a worst-case scenario, sellers of the swaps would not have the cash to make the payments and would have to liquidate their assets to cover their positions.

"The next two weeks will be very telling," Silbert added.

The auction had been watched closely as a gauge for valuing the problems faced by financial companies from the mortgage and housing collapse. And it was one reason why Goldman Sachs (GS, news, msgs) fell 12.4% to $88.80. For the week, Goldman Sachs was down 30.6%.

Moody’s also raised concerns about Goldman’s long-term credit rating on Thursday, lowering its outlook to negative.

Europe and Asia have an ugly day

The American market took its cue at the open from Europe and Asia.

London's FTSE 100 Index ($GB:UKX) fell 8.9%, Germany's Xetra DAX Index ($DE:DAX) was down 7%, and Europe's broader Dow Jones Stoxx600 Index lost 7.5%. Japan's Nikkei 225 Index ($N225) plunged 9.6% and Hong Kong's Hang Seng Index ($HSIX) closed down 7.2%.

Equity trading was halted in Austria, Russia, Indonesia, Ukraine and Iceland.

GM talked merger with Ford and Chrysler

General Motors (GM, news, msgs) approached Ford Motor (F, news, msgs) in recent months about a possible merger, but Ford called off the talks after the auto maker concluded it should continue to go it alone, The Wall Street Journal and The New York Times reported.
News of the merger talks came one day after reports surfaced that GM has recently been in discussions about acquiring privately held Chrysler.Ford was down 4.3% to $1.99.

GM shares rose 2.7% to $4.89 after getting walloped Thursday, when the Dow component lost 31% of its value and fell to $4.76. The last time GM traded at that level was in spring 1950. GM shares had been up in pre-open trading Friday.

• Analysis: Can GM and Ford survive?

GM stock tanked after ratings company Standard & Poor's put the auto maker's credit ratings under review Thursday. S&P said GM has enough cash to make it through 2008, but a worsening picture for the auto industry could cause more trouble next year.

GM said Friday morning that it is facing "unprecedented challenges," but "bankruptcy protection is not an option."

GE earnings are inline

Another Dow component, General Electric (GE, news, msgs), reported third-quarter results that were in line with recently lowered forecasts.

GE earned $4.31 billion, or 43 cents per share, a 22% drop from last year's results. On an operating basis, GE earned 45 cents per share, in line with its lowered guidance of 41 to 45 cents made at the end of September. Analysts were looking for 46 cents per share.

GE has a big financial business, and like the rest of the sector, it has been struggling amid the turmoil.

GE shares closed up 13% to $21.50.

Worries about Morgan Stanley weigh on stock

Morgan Stanley (MS, news, msgs) shares fell 22.3% to $9.68.

That was something of a victory; the shares had been down as much as 40% early in the day after plunging Thursday on worries that its deal with Japan's Mitsubishi UFJ wouldn't go through.

Adding to the worry were comments from Moody's Investors Service that it may cut Morgan Stanley's credit rating.

Mitsubishi UFJ two weeks ago offered $9 billion for a 21% stake in Morgan Stanley. At the time, Morgan was trading at $25 per share.

The Wall Street Journal has said the deal with Mitsubishi UFJ is set to close on Tuesday.

"The company must have the ability to roll over its debt and operate with counterparties in the market on a daily basis," Ladenburg Thalmann analyst Dick Bove said in a note on Saturday. "If it can do this, it will survive and ultimately thrive. If it cannot it faces a difficult future."

An injection of $9 billion in cash won't solve Morgan Stanley's problem, he added. The company’s debt must be guaranteed.

Short hits from the markets -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.210%	0.580%	-0.370	-76.67%	-93.31%
5-year Treasury note yield	2.762%	2.823%	-0.061	-7.50%	-20.06%
10-year Treasury note yield	3.861%	3.834%	0.027	0.89%	-4.31%
30-year Treasury bond yield	4.137%	4.120%	0.017	-3.90%	-7.22%
Currencies
U.S. Dollar Index	83.310	81.365	1.945	4.98%	8.63%
British pound in dollars	$1.7042	$1.7091	-0.0050	-4.40%	-14.33%
Dollar in British pounds	£0.5868	£0.5851	0.0017	4.60%	16.73%
Euro in dollars	$1.3486	$1.3598	-0.0112	-4.36%	-7.73%
Dollar in euros	€ 0.7415	€ 0.7354	0.0061	4.55%	8.37%
Dollar in yen	99.50	99.59	-0.09	-6.16%	-11.04%
Canadian dollar in U.S. dollars	$0.841	$0.872	-$0.0306	-10.54%	-15.26%
U.S. dollar in Canadian dollars	$1.188	$1.147	$0.0417	11.72%	17.92%
Commodities
Gold	$859.00	$886.50	-$27.50	-2.48%	2.51%
Copper	$2.1445	$2.4060	-$0.26	-25.51%	-29.48%
Silver	$10.6000	$11.8750	-$1.28	-13.65%	-28.95%
Corn	$4.0825	$4.3825	-$0.30	-16.26%	-10.37%
Crude oil (NYMEX) (per barrel)	$77.70	$86.59	-$8.89	-22.79%	-19.05%